The 2014 Autumn Statement provided another opportunity for Chancellor of the Exchequer George Osborne to make Individual Savings Accounts (ISAs) more attractive to investors and he duly obliged.
Over the past five years, a range of mostly welcome changes have included broadening the scope of allowable investments – to incorporate retail bonds, peer-to-peer lending and Alternative Investment Market shares – and a significant increase in the annual allowance. Now partners will be able to inherit a deceased spouse’s ISA account or accounts.
Previously, ISAs lost all their tax benefits on the death of the holder and formed part of their estate for inheritance tax purposes. From now on, for deaths on or after 3 December 2014, the surviving spouse will be deemed to have an additional ISA allowance, equal to the amount the deceased spouse had in their ISAs, which can be used from 6 April 2015.
The new rules mean spouses can preserve any tax-free income stream their partner had received. The new structure is complicated – technically, the ISA wrapper and its tax benefits still disappear on death and the investments are still theoretically part of the estate for inheritance tax purposes.
This means that if the ISA is assigned to anyone but the spouse, it will be taxed as before. It is only because there is no tax on inter-spouse transfers that it escapes under the new rules and it is only through the additional one-off allowance to the surviving spouse that – from 6 April 2015 – the Isa retains its tax-sheltering benefits.
The Treasury commented: “150,000 married ISA savers pass away each year and their ISA tax advantages die with them, even if they were saving as a couple. From 3 December 2014, if an ISA saver in a marriage or civil partnership dies, their spouse or civil partner will inherit their ISA tax advantages.
From 6 April 2015, surviving spouses will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance, and so will be better able to secure their financial future and enjoy the tax advantages they previously shared.” The ISA limit is also set to increase to £15,240 from 6 April 2015.After the significant rise announced last year, this year’s rise is linked to the September inflation figure, as will be the case in future.